Putting energy transition in a perspective

Last week was all about energy economics for me. On Tuesday I gave a brief talk and was a member of a panel on a IAEE webinar (info and hopefully a recording soon available here). One of the key questions that came out of the webinar was whether it is a good idea to require those investing in renewable utility scale capacity to also invest in long duration electricity storage.

Later that day I attended a talk by my former Honours student Julia Manchester at AARES 2022 presenting our work on the effect of renewable generation on the revenues of coal-fired power plants. The main point of this work is that revenues of coal-fired power plants will continue to drop as there is more renewables in the system, which will force coal plants to retire sooner then planned. This could not be better exemplified than by the announcement made this week by Origin Energy that Eraring coal-fired power plant they operate will close down in 2025, seven years earlier than planned.

This news was quickly followed by an announcement of the NSW Government that it will build a large-scale battery to buffer the exit of Eraring from the system. To an extent, this justifies the point made at the IAEE webinar that storage (whether battery, pumped hydro, or green hydrogen) will be needed as coal-fired stations rapidly exit the system. The question is whether the taxpayer should pay for this storage (as proposed by the NSW Government) or whether it should be the generators, including renewable generators, that operate in the NEM. This is an area where more research and better understanding are needed.

Also on Tuesday, I attended a talk on Gas Games with Electricity, which investigated the strategic behaviour of energy companies that operate in both electricity and natural gas markets in Australia, given the important role natural gas generation is playing in setting the electricity price, and vice versa.

On Thursday, I first attended a talk on Investment, Emissions, and Reliability in Electricity Markets. This is a rare paper on the WA electricity market, as the attention in Oz has been almost exclusively on the NEM. The paper investigates how certain policies (carbon taxes, capacity payments, and a combination of both) will affect the speed of coal-fired power station retirements in WA.

And also on Thursday, I was an invited discussant at a keynote by Paul Burke at AARES 2022 where the prospects and potential of Australia producing and supplying renewable energy to SE Asia were discussed. Key message there was that Australia has excellent opportunities to develop large scale renewable energy generation and to export that energy directly or indirectly, whether through undersea cable connectors, green hydrogen, or simply by developing energy intensive industries for export.

Australia is currently undergoing a dramatic and irreversible change in the way it produces and uses energy. Those changes are tumultuous, and there are many problems that we will have to solve as we go. Coal is clearly going out the door, and there is no way back in. We will need energy storage to withstand its rapid exit, as we already have plenty of renewable capacity and much more is coming. What type of storage is optimal, and the optimal institutional setting for building that storage are questions of imminent research interest. Alternative approaches that have been initiated by the government, such as building closed cycle gas-fired plants to only operate in emergency situations seem like overly expensive and environmentally irresponsible insurance policy.

But the current problems that we face seem modest when we take the perspective of a long-term energy future. As rich in renewable resources as it is in fossil fuels, Australia is again ‘a lucky country’, at least when it comes to opportunities. What we make of those opportunities is going to determine how well we travel in the second half of this century. Energy future is bright if we make the right choices at the right time!

Author: Tiho Ancev

Tiho Ancev is a Professor of Agricultural and Resource Economics in the School of Economics, University of Sydney. His main research areas are agricultural, environmental, natural resource and energy economics. Tiho’s main contributions have been in water economics and policy, economics of energy, economics of air pollution and climate change policies, and economics of precision agriculture and agricultural input use. He has published widely on these topics in top international peer reviewed journals. Tiho has led and contributed to national and international research projects in these research areas. He is currently the Managing Editor-in-Chief of the Australian Journal of Agricultural and Resource Economics.